Accenture CM AWAMS POV High Net Worth China Final Oct 2012

8/9/2019 Accenture CM AWAMS POV High Net Worth China Final Oct 2012

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Wealth and Asset Management Services | Point of View

Understanding the High NetWorth Market in China


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The fast growing countries in Asia Pacific are expected to beamong the worlds largest economies in the coming years. Thenumber of high net worth (HNW) individuals in Asia-Pacific

expanded 1.6% to 3.37 million in 2011, making Asia-Pacific thelargest region for HNW individuals for the first time, surpassingNorth Americas HNW individual population of 3.35 million.

After Japan, China currently hasthe second-highest number ofHNW individuals in this region about 1.3 million with acombined wealth of $4.3 trillion.1

The demographic make-up ofthese countries also makesthem extremely enticing towealth managers, as theirpopulations are educatedand technologically savvy.

In addition, they have risingdisposable incomes, a strongappetite for luxury westernbrands and growing interestin sophisticated wealth

management services. This highgrowth, coupled with regionalpolitical stability and therelaxation of regulatory controlsby central banks in Asia, hasproduced an environmentin which the investmentmanagement sector has enjoyeddouble digit growth over thepast several years. However, therecent economic slowdown inChina will likely dampen growth

at least over the near-term.


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Populated by of the broadest segment ofHNW individuals in the world, China is

obviously at the heart of the Asia Pacificmarket. Though the Chinese economyappears to be experiencing sluggishgrowth in 2012, the demographic trendsand easing of restrictions are compellingfirms to increase their investments inthis market, especially as the developedmarkets continue to oscillate lower. Theeasing of restrictions on foreign holdingswill provide greater opportunity foradditional foreign influence for Chinasvery young wealth management culture,a business that has seen considerable

evolution over the past decade. Thewealth management market in Chinais highly attractive to foreign entrantsas it remains an underserved marketwith approximately $266 billion undermanagement This translates to just 7%of the more than $4 trillion in investibleassets held by HNW individuals in 2011.2

Accordingly, over the past decade, theChina wealth management industry

has become one of the most frequentlystudied topics by the media, academiaand institutional researchers (for exampleBCG, Bain, Accenture, Capgemini, CreditSuisse and other financial services).However, the market insights publishedhave been based primarily on micro-economic data and quantitative analysis.Not much has been written about thesocial, behavioral and cultural aspectsof Chinese HNW individuals, which is animportant piece of the puzzle to helpincrease penetration of these investors.

In this paper, we explore some of thecultural and psychological characteristicsof Chinese HNW individuals and theirimpact on investment needs andpreferences. In addition, we discuss howan understanding of these factors caninform wealth managers and help themdevelop strategies to more effectivelypenetrate the Chinese HNW market.

The HNW Opportunity in China


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China, with a population of over 1.3billion people and 18 trillion in bank andfinancial institutional assets, earned thenumber two spot on the 2012 ForbesBillionaires List with 95 billionaires,compared to 424 in the United States.This ranking can largely be attributedto the record number of Initial PublicOfferings which made billionaires outof their founders, such as search engineBaidu co-founder Robin Li.

Unlike their counterparts in the West,most of Chinas HNW individuals arebetween 40 and 50 years old, were bornin poverty, and grew up in an environmentbereft of the modern technology that isnow quite common.3 The stock marketdidnt even exist for most of these HNWindividuals lives. Economic liberalization,which gained momentum over the lastdecade, catapulted many Chinese out ofpoverty and into sudden wealth. Despitegiving up the #1 spot on the latest ForbesChina Rich List to beverage magnet ZongQinghou, Baidu founder Robin Li, in the#2 spot with a personal wealth estimatedat just over $8 billion, continues tobe the face of first generation ChineseHNW individuals.

He spent most of his childhood in thecity of Yangquan in Shanxi Province.Bothof his parents were factory workers. Herose from modest beginnings to greatwealth without many stops along theway.4For most very wealthy Chinese,there was no intermediate, middle classstage in their wealth accumulation. Thememories of the hard times they enduredearly in their lives remains fresh in theirminds. This social and historical context

helps rationalize a set of seeminglycontradictory characteristics of ChineseHNW individuals and informs theirinvestment preferences and risk profiles.

Many Chinese HNW individuals takepride in their personal successes whichparalleled the phenomenal rise of theirnations economic power. Yet, they remainskeptical about the long-term stabilityof their economic environment andthe sustainability of their prosperity.5While keeping their faith in continuedeconomic success over the comingdecade, they are mentally cautious aboutpotential slowdowns, political turmoiland any resulting loss of their hardearned wealth. Many HNW individualsare hedging this perceived risk by

accessing overseas markets and sendingtheir children, usually the only childin the family, to western countries foreducation or immigration.6So, whileChinese HNW individuals are optimisticabout their near-term future, manyremain reserved about the long-termprospect of the Chinese market. Thus,their preferred investment strategy tendsto be near-term oriented rather thanover a longer time horizon.

A large number of Chinese HNWindividuals like to translate their fasttrack wealth into tangible rewards, suchas consumption power, exclusive accessand social status. The long-standinghierarchical nature of Chinese societyin combination with the very unequaldistribution of wealth in China todayhave resulted in Chinese HNW individualsgreatly appreciating prestige and wealthstatus, along with the services/life stylesthat correspond to that status. ChineseHNW individuals are among the largestconsumers of luxury goods in the world.Even with the hefty taxes applied tothe price tags of imported brands suchas Hermes, modern shopping centers inChina rarely lack cash paying customers.

The Psychological and Behavioral Make Upof Chinese HNW Individuals


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At the same time, the first-generationHNW individuals prefer to be discreetabout their financial holdings and incomesources, considering visibility such asbeing listed on the Forbes or Hurun (theChinese version) Lists of richest people asunwanted recognition. They even believethat many such honors have proven to bethe start of personal demise. In contrast,second generation HNW individuals, whogrew up wealthy, enjoy showing off their

affluence. In keeping with these first andsecond generation HNW biases, wealthmanagement service providers couldeffectively cultivate relationships withboth first and second generation HNWindividuals by offering them prestige,status-based services but in a verydiscreet fashion.

To continue the momentum of wealthgrowth, Chinese HNW individuals havea persistent interest in high returninvestment channels. For the past twodecades of economic boom, leavingmoney in savings accounts or funds withmodest returns, versus investing in thestock market and/or real estate, wouldhave meant a hefty opportunity cost, andwealth being left on the table. Meanwhile,

China has been on a journey from animmature, under-regulated economicenvironment towards a graduallymodernizing financial infrastructure.

HNW individuals still have reservationsabout external advisors and wealthmanagement providers without strongcredentials, sufficient transparency and aproven track record in China. The self-made nature of the first generation of

HNW individuals has also made themconfident in their business acumen andprotective of their hard-earned wealth.They would prefer to manage theirwealth/investments themselves ratherthan enlist the help of a managementor advisory f irm. While they are notextremely risk-averse investors, they dotend to think twice before signing up fora discretionary service that they reallydont understand. However, the tolerancefor substantial loss for first generationHNW individuals is quite low. To addressthese characteristics of Chinese HNWindividuals, wealth management firmscan structure their product port foliosto cater to this type of risk profile andtransparency requirements.


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Historically, the preferred investmentchannels in China have been the stock

market and real estate, which have drivendouble digit growth over the last decade.Indeed, the strong momentum in thestock and real estate markets spawneda tremendous number of billionaires (inRMB or Chinese Yuan) up until 2010.Cash deposits have also been a preferredmeans of investment, although with highinflation and falling real interest ratestheir popularity has waned. While theinvestment portfolios of HNW individualsare evolving along with their changingwealth objectives, the real estate and

stock markets remain their primaryinvestment channels.

However, these traditional sources ofreturn may be drying up. While Chinaseconomic growth prospects remain bright,despite a lower-than-expected forecast of7 percent GDP growth in 2012, real estateand stocks appear shaky. One of the signsof trouble came in December 2011 whenHaitong Securities (HTS), the second-largest brokerage firm in China, called offits planned IPO. HTS was widely expectedto replicate the huge success of CITIC(China International Trust and InvestmentCorporation), another brokerage firm IPOon the Hong Kong Stock Exchange. HTSdecision to pull back its IPO was promptedby a falling stock market, which saw theShanghai index drop to levels not seensince 2000. Those who held stocks duringthis period saw their wealth evaporate,negating any value, real or perceived, in

long-term holding investment strategies.While many stock market investors are

on the watch for a turnaround, manycompanies continue to delay plans to tapthe market for funds. In parallel, 2011 wasalso a turning point for the real estatemarket in China. Heavy investmentsand speculative buying drove housingprices up to levels found in New York orTokyo, overheating the market. Housingin urban areas has become somethingan average employee could only affordif he/she worked straight through untilthe life after. The resulting governmentinterventions, including enforcing

stringent laws on building, owning andselling property have helped cool themarket. But housing prices remain beyondthe reach of most Chinese. Indeed, ghostcities, such as the one in Ordos, a wealthycoal-mining town in Inner Mongoliawhere an entire newly built resort-styletownship lays empty, stand as testamentto the dramatic oversupply.7

So, while the investment portfolios ofHNW individuals are evolving along withtheir wealth objectives, the real estateand stock markets are also losing theirdominant status as the wealth buildersof the nation. This change in fortune, aswell as the uncertain global economicenvironment, leaves wealth managementfirms at somewhat of a cross roads.They will need to answer whats next forChinas HNW individuals what will bethe new sources of high returns.

The Current State of the Chinese Market


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Wealth Management Services in Chinaare Evolving

Today in China, local banks dominate

the wealth management market based

on their strong asset bases and their

extensive branch networks which serve

large markets and regional hubs. The wide

customer base also offers Chinese banks

the opportunity to convert high-end

clients. While foreign wealth management

firms do have an advantage over domestic

banks as a result of their superior trading

and settlement capabilities, gaining shelfspace in China is difficult for foreign

firms. They must have an extensive

footprint, brand recognition and a solid

track record. To make their mark in

China, foreign wealth management firms

are working to optimize and diversify

their distribution capabilities in order to

challenge the established channels of the

largest state-owned banks.

Additionally, the domestic banks

provide more transparency in portfolio

management compared to foreign banks,

which tend to offer only discretionary

servicesfunds where clients are only

informed of the returns and not the actual

investments. Local banks acknowledge

Chinese HNW individuals propensity

to micro-manage their investments by

providing more transparency regarding

gains and losses. Domestic banks alsohave the exclusive rights to sell RMB-

based products (funds, insurance, etc.)

which are more transparent and easier to

comprehend by local investors.


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Four Ways Foreign Wealth Management FirmsCan Address Under Penetration in China

Today, the Chinese wealth managementmarket remains under penetrated. Theavailability of alternative sources forwealth accumulation over the pastdecades combined with the immaturityof services for HNW individuals haveimpeded the progress of wealthmanagement as a popular means offinancial growth.

However, the most recent slowdown in

the Chinese economy has prompted theworlds 2nd largest economy to look fordifferent growth drivers, such as globalacquisitions in several areas, includingenergy (CNOOC bid for Canadas Nexen),financial services and even entertainment(AMC theatre acquisition). The slowdownhas also triggered HNW individualsto consider alternative investmentapproaches to manage and grow theirwealth. This slower growth environmentpresents a unique opportunity forforeign financial services organizations

to penetrate the Chinese marketplacebased on their strong brands, highlyskilled advisors, superior operationalcapabilities and most importantly, ontheir sophisticated foreign investmentvehicles that are not accessible to HNW

individuals within China. Foreign firms candifferentiate themselves from domesticproviders and increase their penetration ofChinese HNW individuals by:

1. Developing products,services and approachesthat address the specificpsychological and behavioral

characteristics of ChineseHNW individualsWestern wealth managers havemore advanced client segmentationtechniques that they apply to day-to-day operations, including datamining, CRM and micro-economicresearch. Although Chinese domesticbanks are intimate with the HNWindividual community and gained aninitial advantage by understanding theintangible side of this client segment,foreign banks are now in a position totake advantage of the psychologicalinsights described earlier in this paper.

They can infuse these factors into theirexisting operating models and pursueproduct offerings and services gearedtowards the specific psychological andbehavioral characteristics of ChineseHNW individuals. Here are some ofthe most important customizations forChinese HNW individuals:

Focus on shorter term returns vs. a

longer time horizon

Provide more transparency over

products and services

Offer prestigious relationships and

exclusive access to products and

services

Build local financial advisory

workforces that have strong

relationship management skills

Structure client-centric fee models

driven by investment returns vs.

transactions volumes


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2. Engaging the currentgeneration and the nextgeneration of HNWindividuals througheducationThe current generation of Chinese

HNW individuals demand transparency

in investment decisions. Foreign firms

can benefit by devoting resources toeducating this segment to help gain their

buy-in around investment objectives and

approaches. This will also help to engage

them in direct investment activities

over time. Forums such as professional

conferences, investment workshops

and social events are excellent vehicles

for educating HNW individuals and will

also help foreign firms gain traction and

build connections with potential clients.

Investing in educating and building

connections with this client group should

prove to be rewarding in the short-term.

The parents of the upcoming HNW

individual generation have invested in

their children by sending them overseas

to study and to prepare them to take

over their businesses and inherit theirwealth. Given that second generation

Chinese HNW individuals are western

educated, their recognition of foreign

brands is very strong and as such, they

have already begun looking beyond the

domestic Chinese banks for services.

In addition, this group is more attuned

to financial management practices and

more comfortable with the professional

services offered by western financial

institutions. Engaging the second

generation of Chinese HNW individuals

through marketing campaigns and

investment education programs will also

plant the seeds that will be beneficial

in years to come. For example, Standard

Charted Bank developed a wealth

management program to encouragechildren from wealthy families to lead

healthy lifestyles, follow responsible

consumption practices, and learn about

basic investment management principles.

This type of program not only serves to

curb irresponsible spending habits, but

also builds relationships at younger ages.

Chinese First and Second Generation High Net Worth Individuals

Risk Profile Career Choice Education Life Style Attitude

towards

Western World

AttitudetowardsInvestmentServices

1st Generation Risk averse andprotective

Practical Limited tomoderate formaleducation

Practical withsome luxury

Limited accessand reserved

Skeptical andreserved

2nd Generation Risk acceptingand broad

thinking

Inherit parentsbusiness or

broad range ofchoices

Westerneducated and

often advanceddegrees

High-end,much luxury,

some abusivespending

More exposureand more

receptive

Receptive andattuned


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3. Pursuing an onshore/near shore model to offerproducts and services toChinese HNW individualsWith the current restrictions preventinginvestment in foreign currency productswithin mainland China, a number ofwestern companies such as GoldmanSachs have pursued on onshore/nearshore model to build relationships withChinese HNW individuals. The onshore/near shore model helps companies tooffer Chinese HNW individuals accessto a portfolio of global products andservices through offices in strategicnear shore locations such as Hong Kong.

Free business ports like Hong Kongare exempt from the foreign currencyproduct limitations that exist in mainlandChina. For Goldman Sachs, which has aoffices in mainland China as well as anoffice in Hong Kong, they can establishrelationships in their mainland off ices andthen provide their HNW clients with moresophisticated, higher yielding foreigncurrency investment options through theirHong Kong office.

There is precedent for this onshore/near

shore model which has been embracedby some financial services organizations.Of late, many Chinese entrepreneurshave pursued IPOs in Hong Kong and

also opened overseas branches outsideof China, thus enabling the China Yuanto find legal channels to f low into theforeign currency investment market.Providing access to foreign investmentmarkets through an onshore/near

shore model is an important way forforeign institutions to demonstrate theiradvantage over domestic Chinese firms.

4. Engaging in a strategicjoint venture with adomestic Chinese financialinstitutionWhile the Chinese domestic banks

are not yet able to match the brand

names, financial advisor competencies,or products/services maturities of the

foreign banks, they continue to enjoy

the upper-hand from the demand side

from the HNW client base. Their retail

coverage, local client knowledge and

long history have given Chinese banks

the dominant position on HNW client

acquisitions. Despite domestic products

not being diversified and the lack of

service differentiation from competing

banks and between different client

segments, domestic banks still enjoy asubstantial degree of loyalty from HNW

individuals. Given the strength of these

relationships, foreign banks should look

hard at opportunities to collaborate with

Chinese banks with solid client bases

and the desire to grow their wealth

management businesses. Through a

joint venture with a Chinese bank, aforeign financial institution can create a

winning combination of its local partners

substantial client base with its own best

of breed wealth management offerings.


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As Chinese businesses move towardsoverseas markets for expansionopportunities to sustain high economic

growth, Chinese HNW individuals are alsolooking to the global financial stage tomaintain their high investment returns.This environment presents a tremendousopportunity for foreign financial servicesorganizations to flex their muscles and

embrace new psychological and behavioralinsights to reverse the under penetration ofthe Chinese HNW market.


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Copyright 2012 AccentureAll rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture. ACC12-2941/02-506

Notes1. Source: RBC Wealth Management/Capgemini 16th annual World WealthReport 2012

2. Source: China Banking RegulatoryCommission (CBRC) Annual Report 2011

3. Source: China Economic Weekly - 2012

Annual report

4. Source: The Forbes China Rich List 2012

5. Source: WSJ.com, Nov. 11, 2011, http://online.wsj.com/article/SB10001424052970204394804577011760523331438.html

6. Source: www.ibtimes.com, April 7,2012, http://www.ibtimes.com/90-china%E2%80%99s-super-rich-want-send-children-abroad-434838

7. Source: http://www.time.com/time/photogallery/0,29307,1975397,00.html

Contact

Alex Pigliucci

Accenture Wealth and Asset ManagementServices, Global [email protected]

Kevin Boyle

Accenture Wealth and Asset ManagementServices, Asset Management Lead

[email protected]

Yi. Gao

Accenture Wealth and Asset ManagementServices [email protected]

Kelvin Luo

Accenture Financial Services, [email protected]

About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company, with 257,000people serving clients in more than120 countries. Combining unparalleledexperience, comprehensive capabilitiesacross all industries and business functions,and extensive research on the worlds

most successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses andgovernments. The company generated netrevenues of US$27.9 billion for the fiscalyear ended Aug. 31, 2012. Its home page iswww.accenture.com.

DisclaimerThis document is produced by consultantsat Accenture as general guidance. It isnot intended to provide specific adviceon your circumstances. If you requireadvice or further details on any mattersreferred to, please contact your Accenturerepresentative. This document makesdescriptive reference to trademarks thatmay be owned by others. The use of suchtrademarks herein is not an assertionof ownership of such trademarks byAccenture and is not intended to representor imply the existence of an associationbetween Accenture and the lawful ownersof such trademarks.

Accenture CM AWAMS POV High Net Worth China Final Oct 2012

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